The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed’s hiking intentions, with China, or even the ongoing “1998-style” carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program “hasn’t been as successful as we’d hoped.“
Why? “It’s simply because they are running out. There are simply too few of these structured products out there.”
So six months later, the ECB begrudgingly admitted what we said in March 2015, in “A Complete Preview Of Q€ — And Why It Will Fail”, was correct. Namely this:
… the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.
… while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.
Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.
Apple’s market capitalization of $730 billion may now be more than double that of Exxon Mobil, but when it comes to taxes paid to the US government, it’s no contest: the company with record profitability that so many progressive hipsters adore and for whose products they line up with annual regularity is billions of dollars below its “fair” contribution to the US Treasury. Ironically, it is eclipsed by that other company that so many progressives love to hate: Exxon Mobil, which paid $4 billion more in tax than Apple, yet whose valuation has been cut by 15% over the past year as a result of the collapse in oil prices.
With talk that Greek banks have hit their emergency lending limit with the ECB (which has prompted a teleconference this morning among ECB polcy-makers), it seems the newly-found position of negotiating strength for Greece (perhaps encouraged by China or Russia behind the scenes) has prompted more demands:
GREECE’S SYRIZA CHIEF ECONOMIST JOHN MILIOS PROPOSES OVERALL EURO ZONE DEBT OVERHANG REDUCTION BY ECB
ECB COULD BUY ALL EURO ZONE DEBT MATURING IN 2016-2020 AND ALL INTEREST PAYMENTS-SYRIZA’S MILIOS
ECB WOULD FOOT THE BILL NOW, BUT BY 2040 IT WOULD BE ABLE TO ERASE ALL LOSSES THROUGH PROFIT RETENTION-MILIOS
Recall that the stated purpose behind the reason why Mario Draghi’s ECB is about to launch a European government debt monetization program ranging between EUR500 and 1000 billion is to halt deflation, spark credit creation and rekindle inflation. Alas, if that is indeed the case, then as Deutsche Bank said has already determined apriori, it will be a failure. Here’s why from the biggest German bank.
First, a broad strokes preview of what the world’s most confused Central bank will do this week:
[The ECB] is trapped down a dark alley and they will bite. For all the pros and cons of public QE as well as the hows and whens, at the end of the day the market has pushed the ECB into that corner. Within the context of the practical limitations of QE, we have no doubt that Draghi once again will leave a warm fuzzy feeling that they are prepared to do all that it takes. Of course, like OMT, it probably doesn’t mean they are buying BTPs come February 1st, but that doesn’t matter for BTPs. It also doesn’t matter for the Euro zone outlook given the dubitancy of QE efficacy.
As expected, the Federal Reserve has released its Permanent Open Market Operations (POMO) non-monetizing-of-the-debt schedule for April with $30 billion of Treasury purchases (and $25 billion MBS). This is a 33% reduction from the ‘normal’ $45 billion Treasury purchase of last year. The POMO schedule very generously allows traders 3 days of non-money-printing potential shorting opportunities (Friday 4th, Thursday 17th, and Wednesday 30th)… however, this Friday is non-farm payrolls day and we will not be allowed a red day after that…
There is no safe haven, Marc Faber tells Bloomberg TV’s Tom Keene, “The best you can hope for is that you have a diversified portfolio of different assets and that they don’t all collapse at the same time.” Bank deposits are no longer safe; money and treasury bills are not 100% safe; and equities in the US are relatively expensive by any valuation metric. However,at around $1250, gold is a buy, Faber adds on the basis of the ongoing monetization of debt globally. The debt ceiling debacle will lead to the Fed stepping up to directly fund the government (something it already implicitly does but mainstream media prefer not to consider). Faber clarifies the idiocy of the discussions, “both parties want to spend, it’s just on different things,” with “the idiocies of government” having grown way too large, wasting money everywhere… the Democrats are “buying votes” and the Republicans funding the military complex. The debt-ceiling is merely a symptom of the problem, Faber concludes, that “government has grown disproportionately large and that retards economic growth.”
For all complaints about painful, unprecedented (f)austerity, the PIIGS (even those with restructured debt such as Greece) sure have no problems raking up debt at a record pace. Over the weekend, Spanish Expansion reported that Spanish official debt (ignoring the contingent liabilities) just hit a new record. “The debt of the whole general government reached 942.8 billion euros in the second quarter, representing an increase of 17.1% compared to the same period last year. Debt to GDP of 92.2% exceeds the limit set by the government for 2013…” Moments ago, it was Italy’s turn to show that with employment still plunging, the only thing rising in Europe is total debt. From Reuters, which cites a draft Treasury document it just obtained: “Italy’s public debt will rise next year to a new record of 132.2 percent of output, up from a previous forecast of 129.0 percent.”
The Treasury is due to officially update its economic and public finance forecasts on Friday.
The debt-to-GDP ratio came in at a record 127.0 percent last year and is forecast at 130.4 percent for 2013. The document did not contain any new forecast for this year. Read More
Tomorrow is the one year anniversary of the Fed’s announcement of “open-ended” QE, or as we dubbed it, QEternity. A few months later, as Operation Twist expired, the Fed also announced the current distribution of securities subject to monthly monetization: $45 billion in Treasurys, and $40 billion in Mortgages. Sadly, QEternity has failed at stimulating the US economy: in fact, in the last two quarters, nominal GDP growth was 3.1% and 3.1%, which is about 30% lower than in the two quarters preceding last year’s announcement, when it was 4.8% and 4.5%. However, the bigger issue, i.e., “permissive” factor that allowed the Fed to unleash QE, had nothing to do with the economy, and everything to do with monetizing gross US bond issuance in both the Treasury (deficit funding) and Mortgage (stimulating housing) markets. And while we will follow up on how the dynamics of the MBS market have changed in the past year later, one thing is absolutely certain: the amount of bonds available to the Fed for purchasing has declined substantially.
Moments ago the Treasury reported its deficit for the month of August, which was $148 billion, slightly less than the $150 billion expected. More importantly, it was over 22% less than the deficit from August 2012 when it was $191 billion. And that, in a nutshell, is the main reason why the Fed has no choice but to taper.
What the chart below shows is the cumulative deficit of the US for fiscal 2012 and 2013. What becomes immediately obvious is that with the total deficit Year to Date of $755.3 billion running 35% below the $1,165 billion from a year ago, the Fed has far less room to monetize gross issuance. Read More
Excerpted from Diapason Commodities’ Sean Corrigan’s five-part series ‘Time and Money’ (Part 1, Part 2, Part 3, Part 4, and Part 5) originally posted at The Cobden Center blog,
…[Our investments] should be funded with scarce savings, not financed by the paltry fiction of banking book entries and hence the business of investment should be conducted only in accordance with the balance we can jointly negotiate between our current ends and our ends to come; that is, on a schedule which naturally emerges to reflect our societal degree of time preference and which does not emanate solely from the esoteric lucubrations of some central banking Oz.
Progress may be less spectacular this way, unpunctuated as it will be by the violent outbreaks of first mass delusion and later disillusion which comprise the alternations of Boom and Bust. But it will be, by that same measure, steadier and more self-sustaining. Read More
The past week brought us history: on Tuesday, GETCO and Citadel’s HFT algos were used by the Primary Dealers and the Fed to send the Dow Jones to all time highs, subsequently pushing it to new all time highs every single day of the week, and higher on 8 of the past 9 days: a 5ish sigma event. But there is never such a thing as a free lunch. And here is the invoice: in the past 5 days alone, total Federal Debt rose from$16.640 trillion to $16.701 trillion as of moments ago: an increase of $61 billion in five days, amounting to $198,697,068 for every of the 307 Dow Jones Industrial Average points “gained” this week. Because remember: US debt is the asset that allows the Fed to engage in monetization and as a result, hand over trillions in fungible reserves to banks… mostly foreign banks.
The good news is that debt is no longer and issue, and only the level of the stock market matters. Because if the wealth effect at $16.7 trillion and a record DJIA is staggering, just wait until the Obama administration takes the debt to $22 trillion in under 4 years.
At that point, nobody will have ever ever have had more money. Sadly, at some point, all that money will be used to buy a loaf of bread….